Free Trade And The Falling Dollar

Right Democrat writes:

Writing in Friday's New York Times, Steven Weisman asks how low can the dollar go?

"Battered by bad news and mounting fears over the American economy, the dollar plumbed new depths on Thursday, helping drive oil prices to record levels. The greenback traded at a new low of $1.56 against the euro, while oil prices settled at $110 a barrel. Early in the day, the dollar sank below 100 Japanese yen for the first time since 1995, but it ended the day slightly above that milestone."

"The dollar has been declining in value against the euro and several other currencies since 2002, slamming travelers to Europe and American consumers purchasing European goods. Politicians are deploring the weak dollar as a sign of American economic decline and influence."

"To make matters worse, many economists say that the problems of a sagging dollar are feeding off each other. As the dollar weakens, holders of dollars, especially those overseas, are aiming for better returns on their assets by diversifying their portfolios toward other currencies, sending the dollar into further decline."

Weisman notes that Treasury Secretary Henry Paulson says "a strong dollar is in America's interest" and predicts the dollar will at some point "shine through" to regain value.

"But many experts scoff at Mr. Paulson’s pronouncements as happy talk. Warren E. Buffett, the financier, said recently that “the government can talk about how it’s in our interest to have a strong dollar,” but it is not following policies that would help."

"The trade deficit, he argues, means that “we force-feed a couple of billion dollars a day to the rest of the world” — namely to those countries that export to the United States."

"Lately the administration has been pointing to trade figures showing that the American trade deficit is declining. Exports grew more than 12 percent last year, and they grew more than 13 percent in the 12 months that ended in January. The trade deficit was more than 5 percent smaller for that time period as a result."

"Commerce Secretary Carlos M. Gutierrez hailed the latest trade numbers as a reflection of improving American competitiveness. What he and other administration officials never say — indeed they have apparently been instructed not to say it — is that the improvement is a result of the dollar’s decline, which makes American goods cheaper."

The article closes on an optimistic note. Weisman writes, "For all its problems, the dollar is still widely seen as the world’s safest currency." True, but for how long ? America cannot continue to run a huge trade deficit without facing the financial consequences.

Florian Jensen provides a summary of Warren's Buffett's plan to balance the trade deficit:

Buffett explains what a trade deficit is in layman’s terms…

“In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.”

"He goes on to explain why the US can spend like crazy……we can behave today as we wish because our past financial behavior was so exemplary…”

…and warns that it will be over - sometime.

“…our national credit card allows us to charge truly breathtaking amounts. But that card’s credit line is not limitless.”

AND he actually proposes a solution!

“We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties — either exporters abroad or importers here — wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance. ”

http://florianjensen.com/2008/03/09/warren-buffett-on-the-us-trade-deficit/

Our leaders in Washington should heed Buffett's advice and take action to restore sanity to America's trade policies.

It must be in the genes: Buffett's father was the last of the Old Right in the House of Representatives at least until Ron Paul came along, and he didn't have Paul's libertarian social leanings.